Global Economy Reviews

07.03.2012 21:48 World Economy Review - February 2012

Average gross domestic product (GDP) growth in the fourth quarter of 2011 in the area of the Organization for Economic Cooperation and Development (OECD) slowed down to a stagnating 0.1 percent from 0.6 percent in the third quarter, the Paris-based organization said.
Quarterly GDP growth in the United States accelerated to 0.7 percent in the fourth quarter of 2011, up from 0.5 percent in the previous three months, while that of Japan shrank by 0.6 percent following a strong technical rebound of 1.7 percent in the July-to-September period, indicated the latest data in a monthly OECD report.
However, quarterly GDP growth in the 17-member Eurozone and the wider European Union as a whole saw their first down by 0.3 percent in both regions since the second quarter of 2009.
Among all major European economies whose data was available, only France registered a 0.2-percent GDP growth in the fourth quarter of 2011, down from 0.3 percent in the third quarter, while Germany and Britain contracted by 0.2 percent and Italy contracted by 0.7 percent.
Year on year, GDP growth in the OECD area stood at 1.3 percent in the fourth quarter of 2011 against 1.7 percent in the previous quarter, the OECD report said. "For the whole of 2011, GDP in the OECD area grew by 1.8 percent, down from 3.1 percent in 2010," the OECD concluded.
The OECD forecasts German GDP growth to slow to 0.4% this year before picking up to 1.9% next year. On a workday-adjusted basis, it expects GDP growth of 0.6% in 2012 and 1.9% in 2013.
Germany`s labor market still remains in relatively good shape, the OECD remarked. This is due to a decline in structural unemployment as well as a significant increase of flexibility in working hours, demonstrating the beneficial effects of past labor market reforms, it reasoned.
Public debt has increased notably in the crisis, but the budget deficit is the lowest among G7 countries, partly due to the strong labor market, the report pointed out. It projected a German public deficit of 1.0% of GDP this year and 0.5% next year.
The weakening of growth in Germany is projected to come mainly from slowing investment and consumption spending, which may temporarily suffer from adverse confidence effects, as well as from weaker trade growth, the report stated.
The OECD forecast HICP harmonized inflation for Germany of 1.6% this year and 1.5% next year. The institution cautioned, however, that its latest forecasts are "surrounded by an unusually high level of uncertainty and, notably, considerable downside risks."
These risks relate mostly to a further significant worsening of the Eurozone debt crisis which would have considerable adverse effects on the domestic banking system, possibly leading to severe constraints on credit supply, the OECD explained. At the same time, growth could also develop more favorably if contagion of the crisis to other countries can be contained, leading to an improvement in confidence, the OECD said.

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03.02.2012 17:51 World Economy Review - January 2012

The International Monetary Fund cut its forecast for global economic growth in 2012 and 2013, citing growing financial strains and rising downside risks as Europe`s debt crisis entered a “perilous new phase.” In an update of its world economic outlook, the Washington-based institution said it expects global output to grow by 3.3% in 2012, down from 3.8% in 2011 and from a September forecast of 4%. Global output is forecast to expand 3.9% in 2013, down from a previous forecast of 4.5%. “Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro-area crisis entered a perilous new phase,” the IMF said.
The IMF said it now expects rising sovereign bond yields and deleveraging by banks to push the euro-zone economy into a “mild recession” in 2012. It also warned that overly aggressive austerity measures could backfire. The IMF expects the 17-nation euro-zone economy to shrink 0.5% in 2012, followed by growth of 0.8% in 2013. The IMF had previously projected growth of 2.1% in 2012 and 1.5% in 2013.
The report comes a day after IMF Managing Director Christine Lagarde warned that the global economy could slide into a “1930s moment” unless Europe gets a grip on its debt crisis and other economic engines, including the United States and China, meet their responsibilities. Lagarde emphasized the need for stronger, growth-oriented policies, as well as larger firewalls and deeper fiscal integration across the euro zone. Read more about Lagarde`s `1930s moment` warning.
The IMF left its forecast for U.S. economic growth in 2012 unchanged at 1.8%, but pegged 2012 growth at 2.2%, down from an earlier projection of 2.5%. Japan is forecast to rebound from a 0.9% contraction in 2011 to grow 1.7%, down from a September forecast of 2.3%. Japan is forecast to grow 1.6% in 2012, down from the earlier estimate of 2%. The IMF said “sufficient” fiscal adjustment is under way in most advanced economies. It urged countries to let automatic stabilizers - such as unemployment and other benefits - operate freely as long as they can readily finance higher deficits.
Without naming countries, the IMF said nations with very low interest rates or other factors that provide room for maneuver on the fiscal front, including some countries in the euro zone, should reconsider the pace of deficit reduction. At the same time, a lack of a credible, medium-term plan to rein in debt in the United States and Japan provides another downside risk to the global economy, the IMF said. “As long as public debt levels are projected to rise over the medium term, and in the absence of a well-defined and credible fiscal consolidation strategies, there is the possibility of turmoil in global bond and currency markets,” the report said. “A more immediate risk is that an accident-prone political economy will lead to excessive fiscal tightening in the near term in the United States.”
While the IMF slashed growth forecasts for the euro zone, the updated projections “see global activity decelerating but not collapsing,” the report said. The IMF expects most advanced economies to avoid falling back into recession, while emerging and developing economies are forecast to slow from a fast growth pace in 2011. But the report emphasized that the forecast is based on the assumption that euro-zone policy makers intensify their efforts to address the crisis and that policies limit deleveraging by euro-zone banks, avoiding a severe credit crunch.
Overall, emerging and developing economies are forecast to see 2012 growth of 5.4%, down from a September estimate of 6.1%. Growth in 2013 is forecast at 5.9%, down from the September outlook of 6.5%. China is now expected to see growth slow from 9.2% in 2011 to 8.2% in 2012, re-accelerating to 8.8% in 2013. The IMF previously forecast growth of 9% in 2012 and 9.5% in 2013.
The report states that Russia`s GDP growth will slow down in 2012 and 2013. The IMF said that although some imbalances in the Russian economy remain, the country is ready to survive a new crisis and to manage it even better than it did in 2008-2009. The deterioration of the current debt crisis in Europe and a slowdown in the economic growth of the leading developed and developing countries have prompted the IMF revised its forecast on Russia to “less optimistic”. According to the report, Russia`s GDP in 2012 will grow by 3.3% instead of the 4.4% forecast earlier. In addition to that, that the IMF experts predict the country`s budget deficit will grow up to 1.4% of Russia`s GDP.

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06.01.2012 15:21 World Economy Review - December 2011

Fitch Ratings has revised downwards its forecast of global economic growth in 2012, and remains concerned about the ability of politicians in Europe and the US to resolve financial market tensions.
Fitch now puts growth in the major advanced economies (MAE) at 1.3% in 2011 and expects it to remain weak at 1.2% in 2012, followed by only a modest acceleration to 1.9% in 2013. Compared with the previous GEO in October, Fitch has revised down its GDP forecasts over the entire forecast horizon to 2013. The agency forecasts global growth, based on market exchange rates, at 2.4% for 2012 and 3.0% in 2013, compared with 2.7% and 3.1% previously.
Mildly negative quarterly growth rates are likely over the next quarters in the eurozone (EZ) and, among its four largest members, Fitch expects only Italian GDP to contract over 2012 as a whole, by 0.5%. However, the outright contraction of the eurozone economy over 2012 is now a one-in-three probability.
The recovery in the US will remain lacklustre in the short run with stronger growth momentum expected from H212 onwards, weighed down by the continued drag from the housing market as well as fiscal tightening equivalent to around 1% of GDP. In line with weak GDP growth in the EZ, the economic outlook has also weakened in the UK, where Fitch has revised down its GDP growth forecasts again to just 0.7% in 2012 and 2.0% in 2013.
In contrast, Fitch expects the economic growth of BRIC countries will remain robust over the forecast horizon, at 6.3% in 2012 and 6.6% in 2013, well above MAE or global growth rates. Nevertheless, in line with the economic cycle of MAEs, China and Russia will slow in the coming years. Brazil and India have already experienced a sharp slowdown this year and are expected to regain some of the lost momentum by 2013.
In Fitch`s assessment downside risks dominate at this current juncture. In particular, financial tensions may intensify further in the EZ. A special section of the GEO explores such an alternative scenario to Fitch`s baseline case and highlights the fragility of economic growth in the EZ.
Notwithstanding the short and long term decisions taken by the European Council on 9 December to resolve the euro crisis, market tension remains high. Furthermore, progress on US fiscal consolidation or global imbalances could unwind in a disorderly fashion. Therefore, the probability of unfavourable outcomes is high and the risk of tail events, with severe consequences, has increased over the last months. Conversely, improvement in private sector balance sheets could generate stronger demand and a swift resolution of financial stress could boost confidence globally.

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03.12.2011 14:42 World Economy Review - November 2011

The global economic outlook has deteriorated significantly, the Organization for Economic Cooperation and Development said, as it urged the European Central Bank to act decisively to prevent the euro-zone sovereign debt crisis from deepening and possibly dragging the U.S. economy to the brink of recession.
In its twice-yearly report on the global economic outlook, the OECD lowered its growth forecasts for the world`s largest economies, and said the euro zone is headed toward a mild recession. It also warned that the bloc`s debt crisis, now affecting countries previously seen as safe havens, could "massively escalate economic disruption if not addressed."
The Paris-based think tank cut its forecasts among its 34 members to 1.9% this year and 1.6% in 2012, from 2.3% and 2.8% in May. The OECD said it expects the euro zone`s economy to contract by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012. For 2012, the OECD said the 17-country bloc`s economy will only grow by 0.2%.
The German government managed to sell barely half the bonds it had offered in an auction last week, a sign that the currency area`s troubles are affecting its strongest economies. In order to stop the contagion, policy makers need to secure "credible and substantial increases" in the capacity of the European Financial Stability Fund, the euro zone`s bailout vehicle, together with a greater use of the ECB`s balance sheet, Mr. Padoan said.
But there is little sign that euro-zone governments will agree on the measures the OECD believes are needed. Germany opposes France`s plan to give the ECB a greater role in restoring calm to the bond markets. The ECB currently buys limited amounts of government bonds on the open market to stem the rise in borrowing costs.
The OECD warned that possible but unlikely outcomes, such as a disorderly default on government debt, or a breakup of the currency area would have repercussions around the world. The OECD also warned that continued troubles in Europe, along with spending cuts and tax increases set to take place following the failure to reach a deal by the U.S. Congressional debt committee could push the U.S. economy to the brink of recession.
The OECD expects the world`s largest economy to grow by 2% in 2012, having forecast an expansion of 3.1% in May. It expects growth to pick up again to 2.5% in 2013. But without action in Congress, the OECD projects that U.S. economic growth would be barely measurable at 0.3% next year that will only improve to 1.3% in 2013.
The economic slowdown also is affecting trade, the OECD said, as it cut its prediction for global trade growth to 6.7% for this year and 4.8% for 2012, less than the 8.1% and the 8.4% increase previously expected.
The OECD said developing economies will continue to make a "substantial" contribution to global economic growth. The OECD said China would be better able to respond to slower growth if the yuan were allowed to appreciate.
"Without such currency policy, domestic monetary policy instruments... have to be kept at comparatively more restrictive levels to keep inflation on track," the OECD said. "Such a strategy involves a risk of an excessive economic slowdown."

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03.11.2011 13:50 World Economy Review - October 2011

Real gross domestic product (GDP) is projected to grow by about 3.9 percent this year, 3.8 percent in 2012 and 4.6 percent in 2013 on average in G20 countries if without comprehensive policy action to heal euro area debt crisis and secure fiscal policy in the United States, the Paris-based Organization for Economic Cooperation and Development said.
The OECD lowered its 2011 GDP growth estimates for the Eurozone from 2% to 1.6% and the 2012 estimate from 2% to 0.3%. For the United States, GDP is expected to expand by just 1.7% this year, from a previous forecast of 2.6% growth, and by 1.8% next year, down from initial estimates of 3.1% growth. China`s GDP growth estimate was raised from 9% to 9.3% for 2011, but lowered from 9.2% to 8.6% for 2012.
In a brief outlook report about G20 members, OECD expected "marked slowdown" in the euro area with "negative growth" in some economies while the US growth is projected to be "weak" with "a gradual pick-up from 2012."
The short-term economic outlook is heavily weighed down by uncertainties in the major advanced countries so that G20 leaders need to take "bold decisions" and "decisive actions" shortly, OECD Secretary-General Angel Gurria urged when presenting the report ahead of the G20 Summit in Cannes. Refusing to detail which eurozone countries would see the "negative growth", Gurria warned "this projection would happen if no actions were taken."
According to the OECD projection, GDP growth to remain weak in the advanced G20 economies over the next two years while the pace of activity in the major emerging markets is likely to be lower than in the pre-crisis period.
Due to slow economic growth, "unemployment is set to remain high in many advanced countries" with an average rate at 8.1 percent for 2011, 8.2 percent for 2012 and 8.0 percent for 2013, the OECD data showed. "Employment is the elephant on the table, not under the table," Gurria underscored.
As to euro area debt crisis, Gurria praised EU leaders` deal on Oct. 26 "an important first step" to address the debt and banking crisis, but he also pointed out these measures must be implemented "promptly and forcefully."
Many acclamation as well as buoyant market followed the EU bailout package passed on Oct. 26 as it finally agreed to recapitalize European banks with over 100 billion euros (140.18 billion U.S. dollars) and increased the EU bailout fund to 1 trillion euros (1.40 trillion U.S. dollars), but economists also called for more specific details to follow up.
"However, more detailed information is needed on the specific measures, including the options for EFSF enhancement," the OECD note said. "For the first time, we are talking about fiscal union, de facto fiscal union," Gurria added referring to solutions to Eurozone debt crisis. Current situation is "moving toward the right direction" but "decision" "execution" and "action" are what`s most in need.
Out of concern on G20 fiscal situation, the OECD note additionally revealed public debt against GDP ratios for the United States, Eurozone and Japan. The U.S. public debt is to bulge from 97.6 per cent of GDP this year to 103.8 percent in 2012 and 108.7 percent in 2013. The Euro zone`s data will be 95.2 percent, 97.2 percent and 97.6 percent from 2011 to 2013 in order while that for Japan is to reach 212.3 percent, 219.8 percent and 227.6 percent in order.
Gloomy outlook in advanced countries also increased risks of "unchanged" global imbalances while Chinese current account surplus is falling but that of the high-saving and oil-exporting countries are collectively rising.

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